MULTIBAGGERS : TAMIL NEWSPRINT

Ambareesh Baliga, Karvy Stock Broking

Tamil Newsprint : Reco Price Rs. 100.70 CMP: Rs.103.75

TNPL is poised to tap growth opportunities in the paper industry with its capacity expansion. Higher volumes, low cost of pulp and better realisations are expected to the growth in operating profits and the stock can be accumulated at current levels with a 12-month target price of Rs 150.

TNPL (Rs 100.70)

TNPL is poised to tap growth opportunities in the paper industry with its capacity expansion which would assist the company tide over the cost pressures that the industry is facing. Better price realisations and higher volumes would aid in revenue and EBIDTA growth. With its expansion, which will hike its capacities to 3.65 lakh TPA with expected capex of Rs 6800 mn, this incremental capacity will come on stream by September 2009. This capex will be funded from Rs 1800 mn from internal accruals & the rest by fresh debt.

Capacity Expansion

TNPL is poised to tap opportunities with its plans to expand capacity from 2.3 lakh tpa to 3.65 lakh tpa with the Paper industry is likely to maintain steady growth of 6%. Demand for duplex boards, copier and coated grades of paper is likley to contibute a large part of this growth

Change in product mix

The company has been shifting its product mix in favour of the higher value add branded copier paper. Branded copier paper, on an average enjoys a 10-15% premium over prices of creamwove paper. Production of branded copier paper has registered a growth of 32% over a four-year period on a CAGR basis. The favourable mix towards branded copier paper would deliver better margins.

New Ventures – Cement Plant

TNPL plans to set up a mini cement plant using the waste products generated from its paper mill as a raw material. TNPL will set up a cement plant with a capex of Rs 450 mn adjacent to its paper factory at Kagithapuram in Karur district. The cement plant with a capacity of 400 tonnes a day would process waste lime sludge and excessive fly ash from the paper plant and is scheduled to get commissioned by March 2009. About 30 acres of land has been earmarked for the plant within about 780 acres owned by the company near Karur. The plant will initially manufacture Portland cement varieties and could get into production of special varieties of cement in phases.

IT Park

The company also proposes to construct an IT Park measuring an office area of 4 lakhs sq. ft. in a vacant land of the company.

Wind Farm to control power costs

TNPL has completed its Wind Farm expansion to 35.5 MW, which will help control its power costs in a regime of increasing pulp prices. TNPL has applied for Carbon Credit registration. It has uptil now cumulatively accumulated 42000 CER (certified emission reductions) for the last 3 years, 14000 CER per year. Income from Carbon Credit will be realised in FY08.

Investment for farm initiatives

TNPL is investing in Farm initiatives to secure relationships with farmers & also, to own the farm assets. The company expects full benefits of such an initiative to start coming in from financial year 2010 onwards.

Outlook & Valuations

The demand for paper is rising and the prospects appear good for the industry. Higher volumes, low cost of pulp and better realisations are expected to the growth in operating profits in FY08 and FY09. We expect the company to report earnings of Rs 15.8 in FY08 & Rs 19.1 in FY09E and and at the current price the stock is trading 6.4xFY08E and 5.3xFY09E earnings. We recommend the stock to be accumulated at current levels with a 12-month target price of Rs 150 (8xFY09E).

(Rs Mn) FY2004 FY2005 FY2006 FY2007 FY2008E FY2009E
Net Sales 5,836 6,713 8,018 8,844 9,800 10,800
EBITDA 1,166 901 1,565 1,868 2,254 2,592
Net Profit 528 380 805 861 1,098 1,322
EPS (Rs) 7.6 5.5 11.6 12.4 15.8 19.1
EPS growth (%) -28.1% 112.2% 6.8% 27.6% 20.4%
EBITDA Margin (%) 20.0% 13.4% 19.5% 21.1% 23.0% 24.0%
PER (x) 13.3 18.5 8.7 8.1 6.4 5.3
EV/EBITDA (x) 7.98 10.32 6.27 6.61 5.12 4.28
Net margin(%) 9.0% 5.7% 10.0% 9.7% 11.2% 12.2%
ROCE (%) 12.1% 7.7% 14.7% 12.8% 16.0% 17.6%

TNPL
NSE Symbol TNPL
Market cap. (Rsmn) 7,007
Market cap. (US$mn) 171
Shares outstanding (mn) 69
52-week High/Low (Rs) 105/80
Major shareholders(%)
Promoters 35
FIIs 10
Banks/Fis/MFs 32
Others (Including public) 23